Monday, December 06, 2004

An Answer from Max

I think we are ready to close the books on the back and forth between Max/Dean and me on Social Security reform. We could go another round of long post/longer reply, but I think the issues have been laid out by both sides in enough detail. In particular, Max answers my challenge about how he would reform the Social Security system to remove the unfunded obligations. Here is the key excerpt:

Andrew challenges us to pick some time frame over which we can confidently project, reckon with the implicit debt in the program, and provide solutions. This is very easy to do, since I do not have to stand for public office. If backed to the wall, I would simply increase taxes to meet the estimated shortfall. A percentage point on worker and employer would probably do the job. Better would be to expand taxable payroll continuously by indexing the cap, or eliminating it altogether. Some increase in the retirement age along the lines suggested here by Andrew would not be out of the question, depending on the rest of the package. An expanded estate and gift tax could be dedicated to the trust fund.

The Trustees Report tells us that all of these measures would have to add up to the equivalent of 3.5 percent of taxable payroll (as it is currently defined) or 1.2 percent of GDP. I'll assume this is the size of the increase Max would levy, unless Max tells me why he thinks there is a bias (not just imprecision) in the projections that would cause it to be otherwise. Based on his response, I think it is safe to say that Max, "if backed to the wall," would endorse the Diamond and Orszag plan (with perhaps a few changes), which meticulously lays out a way to raise a lot more revenue and reduce benefits somewhat to restore solvency. I would be happy to see a legislative debate that put the Diamond and Orszag plan up against alternatives like this one, which restores solvency without additional revenues and which does not have personal accounts, and some others that restore solvency and incorporate personal accounts.

Why the reluctance on Max's part to have that debate occur? It seems like taking a particular side in a debate over the size and nature of government would be the core activity of an organization like EPI, where Max is affiliated, or CEPR, where Dean is affiliated. I know he is familiar with the old saying in Washington, "You can't fight something with nothing." (Jim Glass points us to George Will's discussion of the Democrats' current "do nothing" approach at his blog.) In the wake of the 2004 elections, it now appears that this issue is going to move. If the Democrats refuse to offer a plan of their own, then we may very well get the plan that the Republicans put forth with little modification. I would think that such a prospect would motivate Max and Dean to get involved sooner rather than later in a more constructive way than just "going to the mattresses."

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